WASHINGTON: — The Federal Reserve raised its benchmark U.S. interest rate for the 17th time in a row Thursday, but kicked off a powerful celebration in the stock market by lowering its alarms about inflation.

Even though the central bank raised the federal funds rate, the interest on overnight loans between banks, another quarter-point, to 5.25 percent, and suggested that it would raise rates at least one more time, investors reacted with relief that the Fed's language was gentler than many had been fearing.

The Dow Jones industrial average surged more than 100 points within five minutes of the Fed announcement, and continued to climb through the afternoon. Bond prices climbed, and interest rates on long-term bonds edged down. The dollar fell against major currencies as foreign investors changed their calibrations for interest rates in the United States. (Page 19)

In its statement on the rate increase, the Federal Reserve said that inflation had been elevated in recent months and that some risks of inflation remained.

Most important, the Fed talked about the need for additional rate increases in the most tentative language it has used since it began raising rates two years ago.

"The extent and timing of any additional firming that may be needed to address risks will depend on the evolution of the outlook for inflation and economic growth," the central bank said. In May, by contrast, when the Fed last raised rates, it declared that "some additional firming may yet be needed."

The differences in the two statements were subtle but significant enough to cause economists and investors to speculate that an August increase was not a certainty.

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Richard Berner, a senior economist at Morgan Stanley, said, "People were expecting something very consistent with the hawkish rhetoric we had heard earlier." He added, "People were pricing in a more hawkish statement."

The Fed's decision had been anxiously awaited, both because of uncertainty about its new chairman, Ben Bernanke, and about the often contradictory signals emanating from the economy itself.

Inflation has crept up noticeably in the past six months, in part because of the recent spike in energy prices but also because of increases in prices for housing. At the same time, the economy seems to have slowed significantly from the torrid growth rate during the first three months of this year.

On Thursday, the government released its final estimate of growth in the first quarter and elevated its growth estimate from an annual pace of 5.3 percent to 5.6 percent - far above the pace that most economists consider sustainable without inflation.

But analysts dismissed the higher growth number as old news. Job creation has slowed sharply in the past three months, to an average of about 125,000 jobs a month, and sank to only 75,000 additional jobs in May.

Although housing starts have bumped up and down in recent months, the inventories of unsold homes have grown much larger in the past year and sales prices are climbing far more slowly. Construction employment fell sharply last month, and there are signs that consumer spending has slowed as a result of high gasoline prices and fewer cash-out home refinancings.

"The central bank is caught in the middle," said Allen Sinai, chief economist at Decision Economics. "This statement is a cautious tip-toeing between a moderating economy and elevated core inflation."